BHP Petroleum Co., Inc. v. State, Wyoming Tax Com'n, 88-232

• Decision Date: 04 January 1989
• Docket Number: No. 88-232,88-232
• Citation: 766 P.2d 1162
• Parties: BHP PETROLEUM COMPANY, INC., a Delaware corporation, Appellant (Plaintiff), v. STATE of Wyoming, WYOMING TAX COMMISSION and its members, Shirley Wittler, Carrol Orrison and Thomas E. Trowbridge in their official capacities and the Department of Revenue and Taxation, State of Wyoming, Appellees (Defendants).
• Court: Wyoming Supreme Court

Page 1162

766 P.2d 1162

BHP PETROLEUM COMPANY, INC., a Delaware corporation, Appellant (Plaintiff), v. STATE of Wyoming, WYOMING TAX COMMISSION and its members, Shirley Wittler, Carrol Orrison and Thomas E. Trowbridge in their official capacities and the Department of Revenue and Taxation, State of Wyoming, Appellees (Defendants).

No. 88-232.

Supreme Court of Wyoming.

Jan. 4, 1989.

W. Perry Dray of Dray, Madison & Thomson, P.C., Cheyenne, and John C. Siegesmund, III, of Parcel, Mauro, Hultin & Spaanstra, Denver, Colo., for appellant.

Joseph B. Meyer, Atty. Gen., Michael L. Hubbard, Sr. Asst. Atty. Gen., Cheyenne, for appellees.

Before CARDINE, C.J., and THOMAS, URBIGKIT, MACY and GOLDEN, JJ.

GOLDEN, Justice.

Appellant BHP Petroleum Company Inc. (BHP) filed an action for declaratory judgment seeking district court interpretation of statutes and regulations governing the assessment of severance taxes on oil and gas production. The district court denied declaratory relief finding that BHP had not presented issues ripe for judicial review. We reverse the district court's decision on ripeness and remand for a district court interpretation of the statutes and regulations challenged by BHP.

BHP has been the operator of a large federal oil and gas unit called the Madden Deep Unit (Unit) since 1982. The Unit includes leases in Fremont and Natrona Counties, Wyoming. BHP owns a small percentage of the oil and gas produced from the Unit, but manages the entire Unit for other parties owning interests in production derived from Unit leases. Its duties as Unit operator are set forth in written agreements with parties who own working interests in the leases.

Each working interest owner in the Unit has the right to take in kind, or separately dispose of, its share of production as it sees fit. Working interest owners therefore negotiate their own sales contracts with various purchasers. BHP acts as collection agent for some of the working interest owners on a number of these sales contracts. Under the Unit agreements BHP files a single comprehensive production report on all production from the Unit and makes severance tax payments on that production. Two scenarios develop from BHP's assumption of this duty: (1) when BHP is acting as collection agent for a working interest owner it computes the severance tax due based on the purchase contract information available to it and remits the tax to the state; (2) when BHP is not acting as collection agent, i.e., where the working interest owner receives direct payment for its share of production, BHP relies on information from the working interest owner to calculate the severance tax; it then remits the tax and invoices the working interest owner for that amount.

In the spring of 1988, appellee the State of Wyoming, Department of Revenue and Taxation (Department) began a comprehensive audit of severance taxes paid on the Unit. Preliminary findings from that audit revealed that some of the purchase contracts required the purchasers to reimburse the working interest owners for any severance taxes due on Unit production they purchased. Department auditors concluded that these reimbursements should have been included in the tax base. The results of the audit were officially released to BHP when, on April 26, 1988, Mr. Edward Dean, Department Senior Examiner, sent BHP a set of "Preliminary Findings" in which the Department concluded that BHP was liable for severance tax deficiencies on past Unit production and that BHP would have thirty days to review the Department's decision. BHP also received an April 27, 1988, letter from Mr. James Petry, Department Director of Revenue, stating that the Department would rely on Department of Revenue and Taxation Rules of Practice and Procedure, Ch. IX, § 7, to hold BHP liable for the entire severance tax deficiency along with any penalty or interest. BHP then received additional time to respond to the Department's preliminary actions and, through counsel, questioned the preliminary report and argued that it should not be liable for the entire alleged deficiency because the Department lacked statutory authority to promulgate the rule requiring that result.

Communications between the Department and BHP did not resolve BHP's concerns and on June 14, 1988, BHP filed a complaint seeking declaratory judgment. The complaint requested a court order specifically finding that: the alleged deficiency could only be collected from the production itself or the owners of that production; BHP was not liable for the entire alleged deficiency; the Department lacked statutory authority to promulgate a rule holding BHP liable for the entire alleged deficiency; and that the rule relied on by the Department be declared invalid. The district court held a hearing on June 23, 1988, after which it ruled against BHP. In a June 29, 1988, decision letter, the district court identified the critical issues in the case as whether BHP, acting as Unit operator, was a person "holding the privilege of severing or extracting" production from the Unit under W.S. 39-6-302(a) and W.S. 39-6-304(h) (May 1985 Repl.); and, whether the language of W.S. 39-6-307(e) (May 1985 Repl.), stating that the severance tax "is a lien upon the interest of any owner and the interest of any person extracting " production from the Unit, applied to BHP as Unit operator. After identifying these issues, the district court concluded generally that initial determination of whether BHP was liable for the alleged deficiency under the severance tax statutes was committed to Department discretion and expertise. The district court also found that...